Is Canada Suffering From 'Dutch Disease'?

To those unfamiliar with the economic concept, all the recent talk among Canada's political class about "Dutch disease" may have left you wondering what nasty ailment had befallen the poor people of the Netherlands.

The term has gained new attention courtesy of NDP Opposition Leader Tom Mulcair, who insists the phenomenon applies to Canada. Mulcair claims that "Dutch disease" has hit the country, blaming energy exports from the Alberta oilsands for artificially raising the Canadian dollar and hollowing out the manufacturing industry.

Coined in an article in The Economist in 1977, the concept refers to the adverse economic effects that the discovery of large natural gas fields off of the coast of the Netherlands in the 1960s had on the country's manufacturing sector.

The theory goes that a boom in a natural resource sector can lead to an appreciation of a country's real exchange rate. That increase in the dollar value makes exports more expensive, and has an adverse effect on the manufacturing sector by making it less competitive.

Mulcair has said that while shifting international trade patterns are responsible for some of the 500,000 manufacturing jobs that have been lost in Canada, "everyone concludes that more than half of them are being lost because we’re maintaining the Canadian dollar artificially high."

Mulcair said the problem is the government is not enforcing legislation that would include the environmental costs of exploiting natural resources.

"Those statistics with regard to the overall losses of jobs in Canada are irrefutable," he said this week. "And they are directly related to the fact that we’re not enforcing federal [environmental] legislation."

His remarks, predictably, have angered provincial leaders in the West and put the Tory government in attack mode.

The issue ramped up on Thursday during a particularly heated question period, as the government used the opportunity to fire back at Mulcair, accusing him of being anti-West.

"I am wondering when the leader of the Opposition will apologize to western Canadians for suggesting the strength of the western Canadian economy is a disease on Canada," Heritage Minister James Moore said in the House of Commons.

"He attacks western Canada, he attacks our energy industry, he attacks all of the West and the great work that is being done by western Canadians to contribute to Canada's national unity. He should be ashamed of himself," he said.

Following question period, Mulcair said the problem is how the government is allowing the oilsands to develop, "without applying basic rules of sustainable development, without applying the one rule of sustainable development, which is polluter pays."

"If you don’t include those costs, we’re doing the same thing as if we had a factory where we were pushing the garbage into a river in the back. It’s not the real profit, it’s not the real price. That’s driving the Canadian dollar up,” Mulcair said.

Yet a recent study by the Institute for Research on Public Policy (IRPP) seems to refute some of what Mulcair has said.

The report,titled Dutch Disease or Failure to Compete a Diagnosis of Canada's Manufacturing Woes, concedes that Canada is suffering from a "mild case of the Dutch disease."

It says it has caused "small surmountable problems for most manufacturing industries and larger challenges for the public finances of resource-rich provinces."

But it also concludes that it's not the exchange rate causing these problems, as Mulcair suggests, but "sluggish productivity growth" and a downturn in domestic and global demand.

Of the 18 major manufacturing sectors studied in Canada, 11 saw a decline in output due to rising energy prices and the associated exchange rate increase, the report said. But 25 of 80 individual industries (which accounted for a quarter of manufacturing output) were adversely affected.

But the largest declines occurred in textiles, apparel and leather products, which account for less than two per cent of manufacturing output, the study found.

Mulcair's case has also been hurt by a recent StatsCan report that revealed manufacturing output rose in March by 1.9 per cent — the biggest gain since last September.

In a recent interview on CBC's The House with Evan Solomon, Bank of Canada governor Mark Carney suggested he doesn't buy into the view that Canada is suffering from "Dutch disease."

Carney acknowledged that Canada's exports have not been strong over the course of the last decade, in part, due to a loss of competitiveness because of the strength of the currency as well as poor productivity.

"But actually, overall, what's been more important than the competitiveness issue, the so-called 'Dutch Disease' issue — I don't subscribe to that, but if you want to put it in that box — what's been more important has been the markets our firms have been focused on," he said.

He said Canada has been focused on slow-growing markets with 85 per cent of our exports going to slow-growth advanced economies.

"Only eight per cent of our exports are targeted at the fast-growing emerging markets. That's something that needs to change because there are longer term trends," he said.

The IRPP report said that "Dutch disease" should be of concern only to the extent that it inflicts permanent damage on the rest of the economy.

"Even if a resource boom is more sustained... whether it causes lasting damage to the manufacturing sector or other sectors of the economy is a question to be answered empirically; permanent damage is not inevitable," the report said.